Capital Cost Allowance (CCA)

Feb 6, 2024

Capital cost allowance (CCA) is one of several methods to lower your business’s taxable income in Canada. The Canada Revenue Agency (CRA) describes it as “a tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to wear and tear or obsolescence.” Similarly, U.S. businesses have a comparable deduction (refer to the IRS Overview on the Depreciation of Assets).

When you purchase property, a computer, or other equipment for your business, you can’t deduct the full cost on your income tax for that year. Instead, you apply capital cost allowance to deduct a calculated portion of the expense as an income tax deduction and continue to do so over several years until the property or equipment is fully depreciated.

 

What Is Capital Cost?

Capital cost refers to the total amount spent on acquiring a property, which includes:

  • the purchase price
  • all fees related to the acquisition, such as legal, accounting, inspection, architectural, and more
  • the cost of any enhancements or improvements to the property that haven’t been previously claimed as expenses.

    It’s important to note that if the property is real estate, you can only claim Capital Cost Allowance (CCA) on the building itself, not the land. Similarly, fees associated with the land cannot be claimed as CCA.

You can start deducting CCA when the property is ready for use. This means when it starts generating income for your business or, if it’s not a building, when you take possession and it is prepared for use. A building is generally considered ready for use when you are utilizing at least 90% of it for your business, or when upgrades or renovations are finished.

For example, if you purchase a commercial building and start renting out office spaces, you can begin claiming CCA from the moment tenants move in. However, if substantial renovations are required before tenants can occupy the building, you must wait until these renovations are completed and the space is usable. Similarly, for equipment or machinery, CCA deductions begin when the assets are operational and being used in your business activities. Calculating CCA correctly ensures that you maximize your allowable deductions and optimize your tax benefits, ultimately enhancing your business’s financial performance. Proper documentation and accurate records are essential for this process.

 

How Is Capital Cost Allowance Calculated?

The amount of CCA you can claim annually is determined by the date of acquisition and the specific CCA class of the property. The CRA categorizes depreciable property into various classes, each with its own designated rates.

CCA is calculated on a declining basis using the assigned rate and the asset’s value after depreciation for that year. CRA Form T2125‘s CCA schedule assists you in these calculations when doing your taxes. For an example, see the section below.

First, determine the class of your asset. For example, if your property falls under Class 8, which includes equipment and machinery, you’ll use the 20% rate. Begin by noting the undepreciated capital cost at the start of the year. Then, calculate the base amount by multiplying the undepreciated capital cost by 50%. Finally, apply the class rate to this base amount to find the CCA for the year. Remember, the remaining undepreciated balance carries forward for future CCA calculations, ensuring you maximize your allowable deductions over time.

 

Do You Include the GST/HST You Paid?

One of the most frequently asked questions regarding capital cost allowance claims on income tax is about the initial cost.

The CRA states that the capital cost of property generally is the amount you paid for it. This means that when claiming CCA and entering the capital cost of any assets like buildings, furniture, or equipment, you should include the GST, HST, or any provincial sales taxes paid at the time of purchase. Additionally, any delivery, shipping, or handling charges should also be included, if they apply.

It is important to note that for most depreciable properties, due to the half-year rule, only half of the capital cost can be claimed in the first year.

After the first year, you can claim the full amount of the CCA rate applicable to the property in subsequent years until the asset is fully depreciated. This systematic approach allows for the gradual deduction of the asset’s cost over time, matching the expense with the revenue it helps to generate. Keep in mind that the rates and classifications for CCA are specified by the CRA and can vary depending on the type of property. Always ensure that you consult the latest guidelines or seek advice from a tax professional to correctly categorize and apply the rates for your assets.

For example, let’s calculate the CCA on a business vehicle in its first three years of use.

The vehicle was purchased for $40,000
It belongs in CCA class 10, giving it a CCA rate of 30%. In the first year, you can only claim half of this, or 15%.
In the first year, the CCA deduction would be $40,000 x 15% = $6,000.
In the second year, the deduction would be based on its depreciated value of $34,000 ($40,000 – $6,000). So, the CCA would be $34,000 x 30% = $10,200.
In the third year, the deduction would be based on its depreciated value of $23,800 ($34,000 – $10,200). So, the CCA would be $23,800 x 30% = $7,140.
This would continue in subsequent years until the vehicle depreciates to zero or is disposed of.

     

    Common CCA Classes and Rates:

    CCA Class CCA Rate Description
    1 4% Most buildings acquired after 1987, unless belonging to other classes. Also includes plumbing, wiring, fixtures, heating/air-conditioning equipment, etc.
    3 5% Most buildings acquired before 1988 unless belonging in Class 6. Includes alterations up to a maximum value of $500,000 after 1987.
    6 10% Log, stucco, frame, or metal buildings acquired before 1979 or used for farming or fishing or having no footings—includes greenhouses and fences. Also includes the first $100,000 of alterations made after 1978.
    8 20% Property not belonging to other classes, such as furniture, appliances, tools, machinery, equipment, etc. Includes photocopiers, fax machines, and telephone equipment.
    10 30% Motor vehicles and some computer hardware and software
    10.1 30% Passenger vehicles purchased in the current tax year and costing more than $30,000 (passenger vehicles have a $30,000 CCA limit)
    12 100% China, cutlery, linens, tools, software, etc. (except systems software)
    43 30% Eligible machinery and equipment used for manufacturing of goods for sale
    46 30% Network infrastructure equipment and software
    50 55% General-purpose electronic data processing equipment and systems software that is mainly for electronic process control or monitoring, communications, or data handling. Includes system software.

    For more detail about classes and rates see the Canada Revenue Agency’s classes of depreciable property.

     

     

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